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Can a Cartel Fuel the Engine of Economic Development?

Noguera, José and Pecchenino, Rowena A. (2005) Can a Cartel Fuel the Engine of Economic Development? CERGE-EI Working Papers (280). pp. 1-35. ISSN 1211-3298

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OPEC’s stated mission is to promote the economic development and growth of its member states while minimizing volatility in the oil markets. But after a promising beginning many member states’ economies have declined rather than prospered—a clear indication of OPEC’s failure to meet their development goals. Thus, we ask if a resource cartel can achieve the joint goals of development and resource market stability. In a model in which oil producing countries choose whether to join an oil cartel or remain in the fringe, we find that, in a highly elastic oil market, a profit maximizing cartel is inconsistent with oil market stability in the face of demand shocks. Thus, it is inimical to macroeconomic stability, an essential requirement for long-lasting capital investment, and therefore economic development and growth. Consequently, it may not be optimal for an oil-exporting country that cares adequately about macroeconomic stability to join the cartel. But for a country where short-run considerations overwhelm long-run concerns, cartel membership may be the correct choice. Yet the oil rich are ultimately cursed by their excessive reliance on their resource wealth—current profligacy begets future decline.

Item Type: Article
Additional Information: © José Noguera, Rowena A. Pecchenino, 2005.
Keywords: OPEC; macroeconomic stability; resource curse; economic development; Oil market volatility; Oil market structure;
Academic Unit: Faculty of Social Sciences > Economics, Finance and Accounting
Item ID: 2806
Depositing User: Prof. Rowena Pecchenino
Date Deposited: 26 Oct 2011 15:04
Journal or Publication Title: CERGE-EI Working Papers
Publisher: Charles University, Center for Economic Research and Graduate Education (CERGE)
Refereed: Yes

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